China has expanded its domestic debt to fund its growth, much of which qualifies as malinvestment, creating financial vulnerabilities its government is anxious to mask.
As I noted in Trade Deal Follies: The U.S. Has Embraced the World’s Worst Negotiating Tactics (April 8, 2019), the trade deal was a Nothing-Burger for the U.S. Without any consequences for violating trade deals, China violates all trade deals, starting with the WTO. (As an example, China has never reported its state subsidies to Huawei to the WTO as required by that treaty.)
The only trade deal that wouldn’t be a Nothing-Burger for the U.S. is one that explicitly gives the U.S. the sole power to decide if the deal has been violated and impose the consequences. Agreements without monitoring, enforcement and severe consequences are meaningless.
Developing nations are prone to cheating on trade agreements, and developed nations are prone to letting them cheat. It’s a simple matter of incentives and self-interest. Developing nations do not have the resources to develop technologies from scratch, so they steal it by reverse engineering, theft of intellectual property (IP) and industrial espionage.
Developed nations are desperate for the new markets, cheap labor
Developing nations have tremendous incentives to limit the goods
China is two economies: one developed and wealthy along the coast, the other rural and impoverished.
China can’t have it both ways: if China can afford an army, navy, space program and power projection of a superpower, as well as a global currency, it can’t claim any implicit “right” to trade deals with no enforcement or consequences, nor can it expect to get a free pass to brazenly flout every deal it signs. China’s leadership has gotten spoiled; it expects the world to cave
Additionally, the issuing nation must “give away” some of its
All of which is to say that China needs the world’s markets and capital–especially U.S. dollars to service its vast USD-denominated debt. China isn’t self-sufficient and so it doesn’t have the leverage to demand much of its trading partners. Rather, China has expanded its domestic debt to fund its growth, much of which qualifies as malinvestment, creating financial vulnerabilities its government is anxious to mask.
As for the much-touted leverage of China’s ownership of U.S. Treasuries, that’s also a Nothing-Burger. China’s stash of Treasuries has been around $1 trillion for many years. The Federal Reserve created $4 trillion out of thin air, and issued loans and guarantees of around $29 trillion in the Global Financial Meltdown.
The Federal Reserve could buy China’s entire stash with newly created currency and the market wouldn’t even notice. The Treasury market is so large and liquid, the Fed and
Trade deals have to work for both parties.
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